This week we’re exploring the state of nine different policy areas across Australia’s states, as detailed in Grattan Institute’s State Orange Book 2018. Read the other articles in the series here.

Energy policy in Australia is a major failure. The federal government has been unable to forge an effective policy to ensure affordable, reliable and low-emissions electricity. It’s time for the states to step up.

The states should fill this policy vacuum if it persists. They should work together on a nationwide emissions reduction scheme through state-based legislation, independent of the federal government. A Commonwealth-led national policy would be best, but a state-based policy is far better than none.

In October 2018 the COAG Energy Council agreed to continue work on the reliability element of the NEG. The states and territories should maintain this support and implement this policy with the Commonwealth government, and so support the reliability of the National Electricity Market during a challenging transition.

The Grattan Institute’s State Orange Book 2018 shows that there is also much the states can do to reduce energy prices. Consumers are understandably upset – household retail prices have increased by more than half in the past decade, according to the Australian Competition and Consumer Commission (see page 7 here).

How your state measures up on energy.Grattan Institute State Orange Book 2018

The federal government is certainly focused on price – Prime Minister Scott Morrison has referred to Energy Minister Angus Taylor as the “minister for getting electricity prices down” – but many important pricing policies depend on state action.

Retail pricing is the obvious example. Poorly regulated retail electricity markets have not delivered for consumers. Retail margins are higher than would be expected in a truly competitive market. Many consumers find the market so complicated they give up trying to understand it.

State governments should work alongside the federal government to help consumers navigate the retail “confusopoly”. Governments should require retailers to help consumers compare offers and get the best deal. They should also stop retailers using excessive pay-on-time discounts (which tend to confuse rather than help consumers and can trap lower-income households), and ensure vulnerable customers do not pay high prices.

However, governments should resist the temptation to use price caps as a quick fix. If set too low, price caps could reduce competition and drive longer-term price increases.

Western Australia, Tasmania and the Northern Territory, which have not yet adopted retail competition, should move in that direction – while learning from the mistakes of others.

Network costs make up the biggest share of the electricity bill for most households (see page 8 here) and some small businesses. This is particularly an issue in New South Wales, Queensland and Tasmania, where network values increased substantially under public ownership and those costs were passed on to consumers.

These states should write down the value of their overvalued networks or provide rebates to consumers, so the price of the networks is more closely aligned to the value they provide to consumers. Given the poor performance of publicly owned networks, any network businesses still in government hands should be privatised.

Until recently, it seemed state governments had learned the lessons from the bad old days of excessively generous subsidies for rooftop solar. That was until August 2018, when the Victorian government committed more than A$1 billion to pay half the cost of solar panels for eligible households and provide an interest-free loan for the remainder. Most of these systems would pay for themselves without subsidy. The Victorian government should abandon this waste of taxpayers’ money.

Finally, Australia’s gas market is adding to the price pain of homes and businesses. As international prices rise, there is no easy way to avoid some painful decisions. But some state policies are making matters worse.

The Victorian and Tasmanian governments’ moratoria on gas exploration and development constrain supply and drive up prices. The moratoria should be lifted. Instead, these states should give case-by-case approval to gas development projects, with safeguards against specific risks.

Australia needs reliable, affordable electricity to underpin our 21st-century economic prosperity. That must be protected while we also decarbonise the energy sector.

Energy market reform was at the forefront of national competition policy in the mid to late 1990s. But reform has since slowed, and the states are partly responsible. The states can rekindle the fire by pursuing a clear, nationally consistent action plan for affordable, reliable and low-emissions electricity.

Australia’s households and businesses – and the environment – are relying on the states to step up.

As Victorians head to the polls in less than four weeks, there is a wider question worth considering than whether or not the Andrews government is likely to be given another term. Do state governments actually matter?

Imre Salusinszky, a former adviser to then- New South Wales premier Mike Baird, recently tweeted: “State government in 2018 is about running four or five businesses. The whole Westminster thing is preposterous. An efficient model would be a six-person executive guided by a People’s Convention meeting biennially for a month. Doesn’t need party politics and chocolate soldiers”.

That seems unlikely, but the idea that state governments have become too municipal to be taken seriously is familiar. For decades, federal politicians with a high opinion of themselves have treated the state government as beneath their notice or contempt.

The exposure of the rorting and corruption of a number of state politicians – notoriously Eddie Obeid and Ian Macdonald during the most recent period of Labor government in New South Wales – has also fuelled a more general contempt for state politics. But the states at least have well-developed integrity systems that have landed a few crooks in prison. It would be mischievous as well as libellous to explore whether some of their federal counterparts have been cleaner or luckier.

The habit of treating state government as a poor relation might not be recent. Most of the big names in colonial politics headed straight into the Commonwealth parliament in 1901. Later, it is doubtful whether a federal politician would have ridiculed a Jack Lang or Ted Theodore – New South Wales and Queensland Labor premiers respectively – as dealers in triviality. But they, too, eventually headed for national politics.

With their eyes on the growing power and prestige of federal government as it acquired ever stronger control of national finances, historians have underestimated the continuing significance of the states in major policy areas. Land has always been a big one, as it is today in relation to housing affordability and urban development.

In earlier periods, closer settlement, soldier settlement and land taxation were all state matters. There is also mining. When he was Western Australian minister for industrial development in the 1960s, Charles Court was practically running an arm of Australia’s international policy in his negotiations with the Japanese over new iron-ore projects.

Large fields of activity remained predominantly state matters after federation – education, health and hospitals, public transport and roads, local government, and law and order. The capacity of the Commonwealth to act in a range of fields was either untested, or tested and found wanting.

In the area of social security, it was far from clear before the second world war that the Commonwealth would become predominant. The Commonwealth also left some fields to the states even where its authority to act was unquestioned – such as in marriage and divorce law before 1959-61.

For much of the twentieth century, most major public utilities, such as railways, were controlled by the states. Many became massive government bureaucracies and monopolies. On a smaller scale, Queensland had state-owned butcher shops and pubs.

In social, industrial and conservation policy, the New South Wales Labor governments of the 1940s, 1950s and 1960s showed that caution was not inconsistent with policy innovation. Rather more adventurously, Don Dunstan’s South Australian Labor governments of the late 1960s and especially the 1970s, provided a blueprint for the social progressivism associated with the Whitlam revolution. Dick Hamer’s progressive Liberal government in Victoria complemented the Whitlam agenda.

South Australian premier Don Dunstan lead a socially progressive government associated with the Whitlam revolution.The Centre of Democracy, South Australia

The 1980s revealed some of the limits for state governments in economic policy. The Victorian Cain Labor Government’s economic interventionism won the active dislike of Bob Hawke and Paul Keating. It ran up against the barrier of national economic policy and, eventually, political turmoil and financial scandal. Other governments were dogged either by corruption, as in the case of Western Australia and Queensland, or financial mismanagement, as in South Australia.

These results pushed the following generation of Labor leaders and governments towards notable caution and probity. By the mid-2000s, the credit ratings agencies were taking on the role of de facto third chamber of the state legislatures.

Still, the Bracks Labor government in Victoria sought to use its personnel and resources to influence the national policy debate. It contributed a National Innovation Agenda, which the Rudd Government took up as a starting point for its own efforts in that field.

The nature of the compact John Howard formulated to get his Goods and Services Tax up, which saw revenue going to the states according to an agreed formula, also provides premiers with a captive national audience whenever the issue of tax policy reform arises.

Where does this leave state government today? In the first place, it shares with federal government control over areas that are among the most controversial and difficult for government. Energy policy is near the top of the list. And no one would regard Victoria’s new euthanasia law as anything other than a matter of high seriousness.

State government’s capacity for innovation and experimentation in fields that matter, and are not dependent on federal control of the purse-strings, remains alive. The Council of Australia Governments, or COAG, offers a forum in which such influence can be exercised. State governments in Victoria and South Australia have been pursuing the idea of a Treaty with Indigenous people, at a time when the issues of constitutional recognition, an Indigenous voice to parliament, and a Treaty or Makarrata have stalled at the national level. At the territory level, it was the ACT government that passed Australia’s first bill of rights law in 2004.

State governments provide Australians with choice and a government that, for most people, will be less physically and spiritually distant from their daily lives than Canberra. There are also the benefits of variety. For some years during the time John Howard was dominating the federal scene, every state and territory government was controlled by Labor.

Today, there is a more even division between the parties. It remains true, however, that in a time of disillusionment and distrust of politicians, state government provides electoral choice, checks on federal government power, and a large array of the services that Australians think of as peculiarly the province of government.

This week we’re exploring the state of nine different policy areas across Australia’s states, as detailed in Grattan Institute’s State Orange Book 2018. Read the other articles in the series here.

Election season is looming.

Voters in Victoria go to the polls within weeks; in New South Wales within months.

State policy has rarely been more important. But what should the priorities be, not only for the governments in Australia’s two biggest states, but also for the other states whose elections are further away?

In this series for The Conversation, based on our State Orange Book 2018, the Grattan Institute outlines where state and territory governments should focus to improve Australia.

There are problems a plenty

The problems aren’t hard to find. Per capita income has been flat for five years as the mining boom subsided. Home ownership is falling fast among the young and the poor. Those on low incomes are spending more on housing, and homelessness is rising, particularly in NSW.

Our schools are not keeping up with the best in the world. In most states, people are waiting longer for medical treatments. Electricity prices have increased significantly over the past few years while the climate policy wars rage on.

A new State Scorecard compiled by Grattan Institute compares states and territories on the most important outcomes for each policy area. In many cases, some states are much better than others because their governments have implemented important reforms – often without much fanfare.

Victoria’s hospitals cost less per patient and contribute more to better health than elsewhere. Queensland’s school students learn more in Years 3 to 5, and they are performing much better than they used to. Many Western Australian school outcomes are also much better.

The Australian Capital Territory has started to replace inefficient stamp duties with a much more efficient broad-based property tax. NSW has used the good times to improve its budget position. NSW, Victoria, South Australia and the ACT have all increased the transparency of political decision-making and tightened controls over money in politics.

But each state can learn from the others

Every state and territory can learn from others and do better.

State governments – particularly NSW and Victoria – face population pressures. They need to resist political pressure to wind back planning reforms that have helped to increase housing supply, and instead go further to ensure enough housing is built, particularly in established suburbs, to accommodate rapidly growing populations.

Fewer restrictions on land use and subdivision will increase economic growth by enabling more people to access more jobs, while allowing firms to optimise their location.

There are other economic levers. All states should follow the lead of the ACT and replace stamp duties with broad-based property taxes.

States should reform electricity markets to encourage reliability and reduce emissions – whether or not the Commonwealth cooperates.

And much states should not do

States should stop promising to restrict competition in order to increase the sale price of assets like ports.

And they should accept that no amount of regional spending is likely to do much to accelerate regional growth beyond what is going to happen anyway.

The State Orange Book 2018 shows that the states and territories could deliver services better.

Each can be guided by the best

Other states should follow Victoria’s lead and reduce the cost of each procedure in public hospitals, and the variations between them.

And they should develop more community-based prevention programs to reduce the disparity between regional and urban health outcomes.

States should lift progress for all school students by identifying and spreading good teaching practices at the same time as strengthening the evidence base on what works best in the classroom.

They should also invest more in early learning for the most disadvantaged students.

And make their decisions more open

Institutional reforms are needed.

States need more visibility of their long-term budget positions.

While institutional accountability is improving in many states, Western Australia, Tasmania and the Northern Territory need to limit election spending and make political donations and lobbying more transparent.

Because they matter

State government doesn’t always get as much attention as our federal politics. Often the important things sound a bit boring: the management of hospitals and schools; the rigorous assessment of proposed transport projects; and the minutiae of planning schemes.

But when these things are done well, they make a big difference to people’s lives.

So when people cast their votes in the Victorian and NSW elections, there is a lot at stake.

We hope this series will help voters to understand the key issues, and perhaps help leaders in every state understand the difference they can make.

Under Section 44(i) of the Australian Constitution – which has been given a strict interpretation by the High Court of Australia in recent cases – a person is not eligible to nominate for, or be elected to, the federal parliament if they are a dual citizen. The removal of such a large number of parliamentarians in such a short space of time is unprecedented.

Throughout this controversy, it has been assumed that any dual citizenship problems are confined to the federal parliament. Certainly, it is widely acknowledged that state constitutions do not contain the same general prohibition of dual citizenship, and that dual citizens are at least initially eligible to be elected to state parliaments.

Unfortunately, the analysis generally stops at this point. There has been little consideration given to the important follow-up question of whether there are any other disqualification provisions that might affect any dual citizens sitting in our state parliaments.

An examination of state constitutions (and relevant electoral laws) reveals that while a dual citizen is eligible to be elected, this citizenship status may subsequently put them at risk of disqualification if they engage with that foreign citizenship while serving in the parliament.

In particular, in New South Wales, Queensland, Western Australia and Tasmania, the state constitutions, or relevant electoral laws, provide that a parliamentary seat will become vacant if a member commits any act that acknowledges allegiance to any foreign power.

This disqualification does not apply in Victoria, the ACT or the Northern Territory, and in South Australia it has been expressly limited to make it clear it doesn’t apply in particular circumstances.

Clearly, these state provisions are substantially different from the dual citizenship prohibition at the national level. A dual citizen is eligible to be elected as a state member of parliament, and will only be disqualified if there is a positive action taken by them that acknowledges a foreign allegiance.

And that’s the pertinent question: what exactly constitutes an “acknowledgement of allegiance”?

A plain reading of this phrase would seem to suggest that any positive act that seeks to exercise any right arising from citizenship would be disqualifying. In essence, a person who seeks to rely on their foreign citizenship in some way (however trivial) is making an acknowledgement of that foreign allegiance. Some obvious examples would be travelling on a foreign passport, or even renewing a foreign passport.

If a state MP from NSW, Queensland, WA or Tasmania did either of these things, they would appear to be in breach of the state constitutional requirements, resulting in their disqualification from parliament.

This broad interpretation is further reinforced by the fact that South Australia saw a need back in 1994 to insert a qualifying provision into its state constitution to provide that members would not be disqualified simply because they acquired or used a foreign passport.

The fact that such a qualification was thought necessary highlights that acquiring or using a foreign passport will ordinarily fall into the category of being an “acknowledgement of allegiance”.

It is important to note these issues have never been tested before the state courts, and there is no particular evidence to suggest any current state parliamentarians are in breach.

It is also worth noting that some jurisdictions – notably Queensland – have provisions that allow parliament to resolve to disregard a “trivial” disqualifying event.

But given we are having a national conversation about dual citizenship and the Australian Constitution, it seems an opportune time to consider the constitutional impact of dual citizenship at the state level as well. Otherwise, we may find we are still left with a constitutional cloud hanging over a number of state parliaments.

At the very least, the affected state parliaments should introduce a citizenship register like the one introduced last year by the federal parliament. Requiring citizenship information be disclosed is a necessary first step to reassure the public that the dual citizenship controversy will not expand to disqualify any of our state parliamentarians.

When the prime minister referred the question of Section 44 to the Joint Standing Committee on Electoral Matters, he did so on the basis that:

Australians must be assured that all members of the Australian Parliament are constitutionally eligible to serve.

The Queensland election was decided overwhelmingly on state factors, as Malcolm Turnbull was quick to say on Sunday, but inevitably it has fallout for the prime minister.

Four implications are obvious in the result, which ABC election analyst Antony Green predicts will be a majority Labor government, while Inside Story’s Tim Colebatch suggests is more likely to be an ALP minority one.

First, it elevates even higher the importance of the December 16 byelection in Bennelong.

Second, it will further unsettle an already depressed and jittery federal backbench.

Third, the federal Queensland Coalition MPs will want greater attention from the government.

Finally, the Nationals – in particular the Queensland Nationals – will accelerate a trend that’s been obvious recently, which is to differentiate their brand.

Bennelong was always destined to be significant, from the moment Liberal MP John Alexander resigned (some government sources think prematurely) in the citizenship crisis. But now that things have gone badly for the Liberal National Party in a state that looms so large for the federal Coalition, the stakes rise.

Turnbull was campaigning in Bennelong on Sunday, falling back on the tried and trusted ground of border protection, claiming that “right now the people smugglers are using Kristina Keneally’s articles, her statements on this, as a marketing tool” (an assertion surely worthy of a factcheck).

He has to get deeply involved in this seat, which is on a 9.7% margin, but the flip side is that the more effort Turnbull puts in, the more he’d be personally identified with a big swing, let alone a loss. On the other hand, if the swing were contained, that would help him.

Psychologically, the Queensland result will send the Coalition’s federal members deeper into the funk caused by the unending run of bad polls and multiple problems engulfing the government. This will accentuate instability and ill discipline, although there is no tangible challenge to Turnbull’s leadership at this point.

The Queensland vote reinforces the now familiar message that people are turned off the major parties. The mid-30s primary votes for Labor (around 36%) and LNP (about 34%) scream disillusionment.

One Nation polled solidly in minor party terms (around 14%) and very strongly in its heartlands, but it couldn’t turn that into the swag of seats it had boasted about. Pauline Hanson’s party fell victim to the inflated expectations it had raised, while the LNP vote fell victim to One Nation.

The result shows the One Nation phenomenon, in terms of its ability to erode the conservative vote, remains a worry, but it does not look like a party on the move.

The Queensland result particularly resonates in Canberra because of how vital that state will be to the Coalition come the election. Federal government members from Queensland will be defensively assertive.

Even before the election, internal chatter had it that senior Queensland Liberal George Brandis would not move out of parliament in the coming reshuffle, as earlier predicted. Revamping cabinet without Brandis while preserving strong Queensland representation would be challenging – and Turnbull could not afford to have Queensland seen to be downgraded.

The federal Queensland Nationals are determined to strengthen their efforts to distinguish themselves from the Liberals and Turnbull.

Nationals cabinet minister Matt Canavan said on Sunday the state result was a “confirmation of how important it is to have a strong National Party at a federal level”.

Nationals MP George Christensen went so far as to issue an apology to One Nation voters. It won’t endear him to Turnbull, but he won’t care. One Nation is on track to win Mirani – from Labor – a seat that adjoins Christensen’s electorate with a small overlap.

Queensland Nationals senator Barry O’Sullivan believes the result shows One Nation is not a threat in terms of House of Representatives seats, but highlights the need for the Coalition to fill the vacuum that party has occupied.

“Malcolm can’t do it himself,” O’Sullivan says. Rather, he says, Turnbull has to allow the Nationals to do this.

O’Sullivan is not one who advocates the de-amalgamation of the LNP in Queensland – as some are doing – but a “divisionalisation”, reinforcing the message of the separate Liberal and Nationals strands within the one party.

This is already underway, with O’Sullivan’s bill for a broad-ranging commission of inquiry into banking and other financial institutions, on which he will have final consultations with sympathisers within the Coalition and other parties on Monday.

He then intends to move a motion in the Senate to have it dealt with immediately after the marriage bill is finished there, and debated until it is resolved. Christensen is ready to back it in the lower house.

Treasurer Scott Morrison is still trying to land initiatives to show the government is acting on the banks, short of a royal commission.

One wonders what Peter Dutton, Liberal holder of a marginal Brisbane seat, who last week was open to the government softening its opposition to a royal commission, is thinking right now.

Key crossbencher Nick Xenophon, whose party commands three crucial Senate votes, has announced he will quit federal parliament to run for a state seat in the March South Australian election.

Xenophon’s shock announcement comes ahead of the High Court judging whether he is entitled to sit in parliament, because he is a dual Australian-British citizen by descent. The case will be in court next week, and a quick decision is expected after that.

His departure won’t change the numbers in the upper house. If he loses the court case, he will be replaced by the next candidate on the Nick Xenophon Team (NXT) ticket. If he wins, his party will fill the casual vacancy he creates. Either way, the NXT will have three senators. It also has a House of Representative member, Rebekha Sharkie.

But Xenophon’s exit could substantially affect the dynamics in negotiations with the government. He has been a tough, canny but pragmatic bargainer, extracting concessions in return for supporting legislation. The two other senators in the NXT, Stirling Griff and Skye Kakoschke-Moore, only entered parliament at the 2016 election.

Xenophon said he would remain in the Senate until the High Court handed down its decision. He denied his decision to quit had been made because of the threat to his position.

Xenophon, heading a team of state SA-BEST candidates, said he would run in the electorate of Hartley, where he lives. It is a marginal seat held by the Liberals.

He hopes the party can gain the balance of power, but ruled out serving as a minister in a SA government. “Once you do that, you’re in the tent”, and then “you can’t be a fearless watchdog,” he said.

“Unashamedly, we want the balance of power to drive deep and lasting reforms in our state’s political institutions and our processes because there is a lack of transparency and accountability,” he said.

“Having candidates that get elected to hold the balance of power will be a game changer for lasting reforms for the state. It is coming from the political centre, not the extreme right or left.”

He plans to keep a strong hand in with the federal party. “I will, of course, still have a very active and direct role in decisions made at a federal level with NXT,” he said.

“With SA-BEST and NXT holding the balance of power in both the state parliament and the federal Senate, we will work together as a united team under my leadership to drive real change to improve the lives of all South Australians.”

Xenophon started in state politics, elected on an anti-poker-machine platform and serving in state parliament between 1997 and 2007, before winning a Senate seat at the 2007 election.

He said SA politics was “broken, politically bankrupt”.

“I’ve decided that you can’t fix South Australia’s problems in Canberra without first fixing our broken political system back home.” He said since last year’s massive power blackout in SA and its record power prices, “I have concluded they are symptoms of a much bigger and deeper problem”.

SA was at a crossroads, he said. The state had long been falling behind because it had been failed by its leaders, parties and institutions.

There seems to be an ever present struggle for a share of the revenue government collects, not only between states but also between the different levels of government.

In each year’s budget, the federal government allocates funds for federal programs (such as defence) and for some programs operated at a state level (such as school education, public transport, and hospitals). It has this role because it also collects more revenue from taxpayers than the states.

The reason for this all relates back to (at least in part) the Australian constitution.

The division of power between the federal and state governments

The federal parliament can only legislate (that is, make laws) in certain areas, known as “heads of power”, most of which are listed in sections 51 and 52 of the Constitution. This gives the federal parliament the power to legislate with respect to matters such as defence, external affairs, immigration, invalid and old-age pensions, and marriage.

In contrast, there is no equivalent limit on the legislative power of the states. The states may legislate in any area. However, section 109 of the constitution provides that where there is an inconsistency between a federal law and a state law, the federal law will prevail. In simple terms, this means that if the federal parliament has made a law dealing with a particular matter, state governments are unable to legislate in ways that conflict with the federal law.

The federal government’s control of revenue

The state and federal governments all have the power to collect tax, subject to some exceptions. Notably, section 90 of the Constitution gives the federal government exclusive power over the lucrative revenue streams of customs and excise duties (taxes on goods, such as alcohol, tobacco and fuel).

Until the Second World War, Australians paid income tax to both state and federal governments. However since 1942, the federal government has been the sole collector of income tax.

The federal government has also collected company tax for over 100 years, and the GST since 2000. The states could still collect income tax if they wanted to, but choose not to for political reasons.

Prime Minister Malcolm Turnbull tried to explore the possibility last year of both the federal and state governments collecting income tax, but this was quickly rejected by the states. While the states generate some revenue – for example through gambling, property and payroll taxes and mining royalties – they are unable to collect anywhere near the same amount as the federal government.

This creates a “vertical fiscal imbalance” between the federal and state governments. Conversely, the federal government is in the opposite position: while the federal government collects extensive revenue, its power to spend and directly fund programs is more limited.

Testing the government’s power to spend on certain programs

Until recently, the federal government thought it could spend money more or less as it pleased. However, the High Court clarified and restricted the federal government’s power to spend money and limited its ability to fund directly some programs.

Its power to spend was tested in 2012 and 2014 in two legal challenges to the government’s funding of the national school chaplaincy program. Prior to the legal challenges, the federal government had entered into agreements with religious service organisations – such as Scripture Union Queensland – to provide chaplains in schools.

The High Court held that (with some small exceptions) the federal government’s power to spend money is limited to where the authority to spend money is expressly conferred by legislation. The legislation authorising the spending must also be supported by one of the “heads of power” granted to the federal parliament by the constitution.

In the case of the chaplaincy program, the court rejected the arguments that the legislation could be supported by the power in one section of the Constitution to make laws for the “provision of…benefits to students” or by the corporations power in another section of the Constitution. To continue the funding of the national school chaplaincy program the federal government turned to the states for assistance.

How the federal government gives money to the states

Section 96 of the Constitution provides for the federal government to provide a significant proportion of its revenue to the states:

…the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit.

This distribution of revenue takes two forms – general revenue assistance (“untied funding”) and payments for a specific purpose (“tied funding”).

The untied funding that states receive from the federal government is largely made up of the money that the federal government collects from the GST. The states can spend this money as they see fit.

However, the passing on of the GST revenue is not unconditional. It’s conditional on the states giving up the collection of a number a number of states taxes.

The federal government may also provide funding to the states for a specific purpose. The states have to consent to receiving the funding (which is not usually a problem), but it does mean that the federal government cannot impose programs on the states that they vehemently oppose.

This funding is tied to a particular project, where the federal government provides the funds and the state carries out the project. Grants such as these have been used regularly to fund education and health projects in the states. These specific purpose grants may be conditional on states meeting regular reporting requirements or achieving certain milestones.

Providing funding to the states through specific purpose grants allows the federal government to have great influence on policy areas that have traditionally been within the purview of the states.

The federal system of government created by the constitution divides power between the federal and state governments. While at times this might seem inefficient, it also provides checks and balances on government spending.

Elections are colourful affairs, and the March 11 state election in Western Australia is no exception. What is bringing particular clamour to this election is the resurgence of One Nation.

Pauline Hanson’s party has certainly made its presence felt. The party is contesting 35 of the state’s 59 Legislative Assembly seats, and fielding 17 candidates across the six upper house regions. According to the polls, it is also the third-largest party in electoral terms. The most recent Newspoll has One Nation’s primary vote at 13%, well ahead of the Nationals (5%) and the Greens (9%).

It is little wonder, then, that the Liberals finally ended speculation by announcing a preference deal with One Nation. The Liberals will direct preferences to One Nation upper house candidates in regional seats. In exchange, One Nation will direct lower house preferences to Liberal candidates ahead of Labor candidates.

While the Liberals’ preference deal with One Nation is the first of its kind since John Howard took the decision as prime minister to place One Nation last on the Liberal how-to-vote card at the 2001 federal election, it is not likely to be the last. Over the past six months or so, the Liberals’ anti-One Nation resolve has been fraying.

In spite of catastrophising in some quarters, the preference deal is important for the Liberal-led government’s chances of re-election. The party’s first preference vote is at 30% and its two party preferred vote is 46%. ABC election analyst Antony Green estimates that “a swing of between 2.2% and 10% against the Liberals would produce a minority government”. In the face of a resurgent Labor Party, such a swing is possible.

The Liberals’ partners in government, the WA Nationals, are the most grievously affected by this deal. Some commentators estimate it could cost them their five upper house seats.

But the Nationals can hardly be surprised by the Liberals’ decision. Although the relationship between the two parties is often civilised, it also has a long history of strife.

In recent years, tensions between the parties were re-ignited when, prior to the 2008 WA election, the Nationals declared they would not be seeking a coalition but a partnership with the Liberals.

The Nationals leveraged the fact that neither major party had attained a parliamentary majority to negotiate a deal that provided for 25% of all state royalty payments to be set aside for re-investment into a royalties for the regions program. While the Nationals eventually agreed to support the Liberals, there was no doubt that the Nationals were seriously entertaining the prospects of doing a parliamentary deal with Labor.

A more traditional coalition arrangement was resumed following the 2013 state election, but the relationship between the two parties showed signs of strain by August 2016. The return of Brendan Grylls – the architect of the 2008 parliamentary agreement – to the Nationals’ leadership, and the unpopularity of the Barnett government, marked the return of a more assertive Nationals party.

Under Grylls’ leadership, the Nationals have been less than willing to commit to a new alliance with the Liberals. Grylls has indicated that support for any minority government would be contingent on the Liberals agreeing to support an increase in the lease rental fee on BHP and Rio Tinto from 25c to $5 a tonne on Pilbara iron ore production. The Liberals oppose this.

Consequences of the deal for the Liberals

The preference agreement carries some risk for the Liberals.

It is not entirely clear whether One Nation preferences will flow in a manner consistent with the party’s how-to-vote card. In part this is a question of whether One Nation has the infrastructure to deliver on the agreement.

A successful how-to-vote card strategy requires a party presence at polling booths on election day. The major parties struggle to cover all of their polling booths, so One Nation is likely to struggle too.

There is also a question mark over whether One Nation supporters will actually follow the party’s how-to-vote card recommendations, even if given one.

If the party’s voter base is anything like some of One Nation’s candidates, there is no reason to think that the preference deal will be widely supported. Already one of the party’s highest-profile candidates, Margaret Dodds, has rejected the deal on the basis of policy differences with the Liberals and concerns about the lack of consultation over the agreement.

Even if a significant proportion of One Nation preferences help to secure the Liberals’ return to government, the deal will cost the Liberals when the incoming upper house members take their seats in May.

While lower house preference deals are difficult for parties to impose on their supporters, there is greater certainty on preference flows for the upper house. Proportional representation, combined with above-the-line voting, makes it highly likely that most of the Liberal surplus preferences will find their way to One Nation’s upper house candidates.

This greatly increases One Nation’s prospects of holding the balance of power in the Legislative Council. Should this happen, the Liberals’ plans to partially privatise the state’s electricity utility in order to pay down soaring debt will not be realised. One Nation is staunchly opposed to the privatisation.

So while the Liberals’ decision is “pragmatic and sensible” in the short term, it might seriously compromise the party’s legislative agenda should it be returned to office.